Protectionism

Protectionism

1. Most economists would argue that free trade will benefit the global economy. However, sometimes countries believe that it is in their interests to restrict trade

   • For example, governments may think it is necessary to protect their domestic producers from overseas competition or they may give financial help to exporters
     • This approach is called protectionism
   • Protect jobs
     • May be used if domestic industries need protection from overseas competitors to save jobs
     • Unemployment is undesirable and a government my be critisied if jobs are lost because of cheap imports
   • Protect infant industries
     • It is often argued that infant industries need protecting from strong overseas rivals until they grow, become established and exploit economies of scale
     • However, it is also argued that this approach may not be successful because governments have a poor record in identifying these new industries with potential
   • Prevent dumping
     • A government may use trade barriers if it feels that an overseas business is dumping goods
     • Dumping is where foreign producers sell goods below cost in a domestic market. This is considered to be unfair competition for domestic producers
   • Raise revenue
     • A government can raise revenue if it imposes tariffs on imports
       • This money can be spent on government services to improve living standards
   • Prevent the entry of harmful or undesirable goods
     • A government might be justified in protectionism it it is felt that overseas producers are trying to sell goods that are harmful or undesirable
   • Improve the balance of payments
     • A country might need to use trade barriers because it has a very large balance of payments deficit
     • A country has to pay its way in the world and if the balance of payments deficit gets out of control, action may be needed
     • A government might try to reduce imports and increase exports at the same time to reduce the deficit

2. Tariffs

   • Governments can use a number of trade barriers to restrict trade
   • One approach is to make imports more expensive. This will reduce demand for imports and increase demand for goods produced at home
   • Imports can be made more expensive if the government imposes a special tax on them. For example, if a government adds £50 to the price of an imported camera, demand should switch from foreign cameras to home-produced cameras
     • Taxes on imports are called tariffs or customs duties
       • In addition to reducing imports, tariffs also raise revenue for the government
   • However, the imposition of a tariff may only have limited impact if demand for the import is price inelastic
     • This is because demand will not fall in proportion to the price increase. The fall in demand will be proportionately less

3. Import quotas

   • Another way of reducing imports is to place a physical limit on the amount allowed into the country. This is called an import quota. By restricting the quality of imports, domestic producers face less of a threat
     • They will have more of the market for themselves. However quotas will raise prices because fewer of the cheaper imports are available. An extreme form of quota is an embargo
       • This is where imports are completely banned from a country. Most embargos are imposed for political reasons
   • Placing physical limits on the flow of imports means that some demand for those goods will be met by domestic employment
     • At the same time, quotas help to prevent domestic or imported goods from overpowering the market. This improves consumer choice

4. Problems with trade barriers

   • Although there are several motives for restricting trade, some barriers may not be effective. One problem is that countries may retaliate when barriers are imposed. For example, is one country imposes a tariff on another country's goods, that country may impose tariffs on its own to block goods coming in. This 'tit-for-tat' behaviour could escalate into a trade war where trade between countries eventually stops
   • Tariffs might also be ineffective if demand for imports is inelastic. For example, it tariffs increase the price of an import by 20%, demand will only fall by 2% if price elasticity of demand is -0.1 therefore, the imposition of the tariff will only have a very limited impact

5. Government legislation

   • Some countries avoid of tariffs and quotas, but still manage to reduce the amount of imports coming in. They do this by insisting that imported goods meet strict regulations and specifications. In some cases legislation can be passed to prevent entry
   • Goods that fail to reach cultural or environmental standards may also face administrative barriers. Some products cannot be imported into the EU. For some other products there are restrictions, or the Food Standards Agency has issued advice saying that particular food products should not be eaten. The most common examples of legal import bans aim to protect consumers from dangerous goods

6. Subsidies

   • Quotas and tariffs aim to reduce imports. Another approach to protectionism is to give a subsidy to domestic producers. This involves giving financial support, such as grants, interest-free loans or tax breaks, to exporters or domestic products that face fierce competition from imports
     • If subsidies are given to domestic products, this will lower prices for consumers because subsidies reduce production costs and increase supply. This forces equilibrium prices down. If subsides are given to exporters it makes it easier for home businesses to break into foreign markets